The real cost driver isn’t claims, it’s chronic disease

When private health insurers talk about cost pressure, the conversation almost always lands in the same place. Claims are rising, utilisation is increasing, and margins are tightening. From there, the focus tends to follow a familiar path, improve claims management, reduce leakage, negotiate harder, and optimise benefits.

But when you step back and look at how leaders are prioritising the challenges facing private health insurance, a different picture emerges. When asked to prioritise across the full set of PHI FACTORS™ drivers, chronic and preventable disease was the most consistently cited pressure, appearing across both current challenges and future impact.

It doesn’t just sit alongside other challenges. It sits underneath them.

The challenge is that most organisations are still set up to respond to the symptom, not the cause.

The system is getting sicker

Across Australia’s healthcare system, the underlying health of the population is deteriorating. Rates of chronic disease continue to rise, obesity is becoming more prevalent, and an ageing population is bringing more complex and ongoing care needs into the system. These are not short-term fluctuations, they are structural shifts that will play out over decades.

What makes this particularly challenging is how these factors compound over time. A member with a single condition often progresses to multiple co-morbidities. What begins as episodic care becomes ongoing management. A one-off claim evolves into a long-term cost trajectory that spans years, if not decades.

From the insurer’s perspective, this shows up as rising claims and increased utilisation. But claims are simply the downstream consequence of a population that is becoming more complex to care for. Focusing only on claims is like trying to manage the symptom rather than the cause.

Why this matters more than ever

This is where the affordability conversation becomes more uncomfortable, and more important. If the underlying health of the insured population continues to decline, then claims will continue to rise, regardless of how efficient the claims function becomes.

Over time, that leads to sustained premium pressure, which in turn impacts member retention and value perception. The cycle becomes difficult to break, higher costs drive higher premiums, which drive greater scrutiny on value, which places even more pressure on insurers to contain costs.

No amount of claims optimisation, on its own, will resolve that dynamic. It may slow it at the margins, but it does not change the trajectory. To do that, insurers need to look further upstream in the value chain and focus on the underlying drivers of health.

Prevention is no longer optional

This is why prevention is starting to move beyond small-scale pilots and into core strategy. Not because it is a nice-to-have or a brand positioning exercise, but because it is becoming economically necessary for the sustainability of the system.

We are already seeing leading funds invest more deliberately in chronic disease management programs, preventative health initiatives, and more proactive forms of member engagement. These efforts are not about generic wellness. They are about identifying where intervention can meaningfully change a member’s health trajectory and, over time, reduce avoidable utilisation.

This is not theoretical. It is already happening. Medibank has been one of the most visible in shifting towards prevention, mental health, and broader health services, rather than just funding care. Other funds are beginning to move in the same direction, exploring earlier intervention and more proactive member models.

The question is no longer if this shift happens, but how quickly it accelerates.

The challenge is that prevention operates on a very different time horizon to most traditional insurance activities. The return does not show up in the next quarter or even the next financial year. It shows up years later through avoided admissions, reduced complexity, and improved long-term outcomes.

That makes it harder to prioritise, particularly in an environment where financial pressures are immediate and visible. But ignoring prevention does not remove the problem, it simply allows it to compound. And as the data shows, this is already the pressure leaders are most consistently pointing to.

Where AI actually fits

This is where AI starts to become genuinely useful, and also where it is often misunderstood. AI will not solve chronic disease, and it will not eliminate the structural pressures facing private health insurance. What it can do is change how early and how effectively insurers respond to those pressures.

Used well, AI enables earlier identification of members who are at risk of deteriorating health outcomes. It supports more targeted and personalised interventions, rather than broad, generic programs. It also creates the potential for more proactive engagement, shifting interactions earlier in the member journey instead of waiting for a claim to be lodged.

In practical terms, this means investing heavier along the value chain, into risk, insights and prevention. However, better insight on its own is not enough. If an organisation does not have the capability, partnerships, or operating model to act on those insights, then AI simply highlights the gap between knowing and doing.

The uncomfortable shift

All of this points to a broader shift that many insurers are still grappling with. Private health insurance was originally designed to fund care. Increasingly, it is being pushed to play a role in influencing health outcomes.

That is a fundamentally different proposition. It requires new capabilities, different types of partnerships, and a mindset that extends beyond reimbursement. It also challenges traditional boundaries, both internally and across the broader healthcare ecosystem.

We are already seeing elements of this shift emerge. Some insurers are investing further upstream in prevention and care pathways, while others are exploring how to better integrate with providers and support members throughout their health journey. These moves are not always comfortable, but they are becoming harder to avoid.

So what should leaders do?

There is no single playbook, but there are a few practical starting points that are becoming increasingly clear.

First, reframe the problem. If the conversation is centred only on claims, it is happening too late in the value chain. Leaders need to be explicit about the underlying drivers of cost, particularly chronic and preventable disease.

Second, be deliberate about where prevention efforts are focused. Not every condition or cohort will deliver the same return. The opportunity lies in identifying where early intervention can genuinely change outcomes and concentrating effort there.

Third, connect strategy to execution. Many organisations understand the direction of travel, but far fewer have embedded it into their operating model, partnerships, and day-to-day decision making. This is where most initiatives stall.

Finally, be realistic about time horizons. Prevention is not a quick win, but it is one of the few levers that can meaningfully change long-term cost trajectories. The longer it is deferred, the harder the problem becomes.

Final thought

The pressure on private health insurance is not being driven by claims alone. It is being driven by a system where more people are getting sicker, earlier, and for longer periods of time.

Chronic and preventable disease does not just sit alongside other challenges. It sits underneath them.

The question now is not whether it matters. It is whether insurers are willing and able to act on it in a way that meaningfully changes outcomes over time.

If you are interested in how leading funds are responding to these system pressures, you can download the 2025 PHI Innovation Report, which explores the key drivers reshaping private health insurance and where the biggest opportunities sit.